The government was last night heading for a clash with public sector workers after the leader of one of the country's biggest trade unions said disputes over pay could bring down Gordon Brown.

As the chancellor, Alistair Darling, used his first Mansion House speech last night to try to allay City fears that Labour had become less pro-business in the past year, the prospect emerged of a bitter battle with public sector workers over low pay.

Darling's pledge to be tough on inflation and public sector pay rounds this year was tailored for the City grandees at the dinner and echoed at the same venue by the Bank of England governor, Mervyn King.

But Dave Prentis, general secretary of Unison, said his union would oppose attempts to impose an "unfair, immoral" pay policy on public sector workers. "This pay policy is built on a lie - a myth peddled by the Treasury that public sector workers' low pay causes inflation."

Speaking at Unison's annual conference in Bournemouth, he said the unions did not help to elect a Labour government in order to then watch its core supporters "suffer", adding: "Our members don't want Gordon Brown to feel their pain - they want him to stand up and heal their pain, to give them fair pay increases."

Unison will announce the result of a strike ballot of 600,000 low-paid council workers in England, Scotland and Wales following the rejection of a 2.45% pay offer - well below the current inflation rate.

Prentis's comments came as the business secretary, John Hutton, warned workers that the 14% settlement won by striking oil tanker drivers yesterday should not be repeated in other sectors. The deal, which has averted possible further disruptions to petrol supplies, is over two years and will see tanker drivers' basic pay rising from £36,000 to £42,000 with overtime.

Underlining government concern about inflation, Hutton said: "I am sure motorists will join me in welcoming the end to this industrial action. The settlement reflects particular conditions within this sector. However, the government remains clear, as the chief secretary said this week, that there needs to be discipline in public and private sector pay if we are to keep inflation under control."

After a distinct cooling in the relationship between Labour and the City in the past year, Darling tried to reassure financiers last night that the government was committed to competitive tax and light-touch regulation. He warned against a return to the high inflation of the 1970s, but expressed confidence that the UK would emerge from its current slowdown without falling into its first recession since the early 1990s.

"Times are tough. It will take time for global difficulties to work through. But our economy will continue to grow," the chancellor said.

"I have seen reports suggesting yesterday's inflation figures show we are returning to the days of the 70s," he said. "They are wrong, both in the nature of the problems we face and also in the scale.

"Today's inflation must be tackled. We cannot be complacent. But in comparison to the 1970s when it reached over 26%, it remains low. Even in 1991, it was still at 8%. And it was home-grown inflation which dogged our economy in the 70s and successive decades ... While the inflationary pressures we faced in the past were primarily domestic, today they are global."

King echoed those comments in his own address, saying that dearer fuel, gas, electricity and food prices meant real take-home pay would stagnate this year. "It will not be an easy time, and I know that some families will find it particularly diffcult," he said.

He also warned that house prices have further to fall because of a squeeze on incomes and the lack of availability of mortgages resulting from the credit crunch.

King said: The squeeze on real take-home pay will arguably be an even more significant restraint on consumer spending this year than the credit crunch. And it will affect the housing market too - lower demand in the high street will go hand in hand with lower demand in the property market."

He added that the era of cheap mortgage finance that underpinned the housing market in 2006 and the first half of 2007 was over.

"As a result, it is reasonable to expect the ratio of house prices to incomes to fall back, though - with real interest rates still low by the standards of the past 50 years - not to previous averages," he said, adding that the UK economy faced its most difficult period in two decades.